Consumer spending, more business investment lead the way
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — The U.S. economy grew 1.7% in the second quarter, aided by solid consumer spending and a ramp-up in business investment, the government said Wednesday.
The increase in gross domestic product was faster than Wall Street expected and suggests the U.S. economy remains on a stable but moderate growth path halfway through the year. Americans continue to spend at a steady clip and the private sector is also pitching in.
Economists polled by MarketWatch had forecast a 1% gain in U.S. growth. GDP is the broadest measure of an economy’s health, reflecting the value of all the goods and services a nation produces.
The growth rate in the first quarter, however, was revised down to 1.1% from a prior estimate of 1.8% as part of the government’s periodic overhaul of how it measures the size of the economy and how fast it’s expanding.Read what you need to know about the new GDP methodology.
The so-called benchmark revision, which takes place about twice a decade, also showed the economy grew faster in 2012 than previously estimated: 2.8% vs. 2.2%. Higher consumer spending and more farm production contributed to the improved performance, the Commerce Department said.
The pace of growth last year reflected the nation’s best economic spurt since 2005. Most of the historical data on economy was little changed, however.
U.S. stocks SPX +0.31% opened higher after the report.
There also was a better-than-expected hiring report from ADP, as the giant payroll processor reported that 200,000 jobs were created in the private sector in July.Read more on ADP report.
Inside GDP report
Consumer spending -— the engine of the U.S. economy — rose 1.8% in the second quarter after a revised 2.3% gain in the first three months of 2013. That’s a touch below the 2.2% average over the past three years.
Perhaps more important, the underlying strength of demand for U.S.-made goods and services improved sharply. So-called real final sales, which omit unsold goods, climbed by 1.3% after a scant 0.2% rise in the first quarter.
Business spending also perked up in virtually every area. Private investment climbed 9%, nearly doubling the first-quarter gain and reflecting the biggest increase in more than a year.
The residential housing market was another bulwark of strength, with investment rising 13.4% to mark the fourth straight double-digit increase.
Companies also stockpiled goods for future sale at somewhat faster clip. The value of inventories rose by $56.7 billion in the second quarter compared to a $42.2 billion rise in the January-to-March period.
Yet growth was tempered in the second quarter by sharply higher imports and decline in government spending.
Imports jumped 9.5% to overshadow a healthy 5.4% increase in exports. Higher net imports are a negative for GDP since it means Americans are buying more foreign goods and services instead of those produced at home.
The spike in imports, however, could also be seen as evidence of a growing appetite by Americans for consumer goods and services. Imports typically surge when the economy improves.
Government expenditures fell again, but at a slower 0.4% rate compared to steeper drops of 4.2% and 6.5% in the prior two quarters.
The drop in spending largely reflects cut backs in the federal government required by the so-called sequester that went into effect in March. Federal spending dipped 1.5%, including a 0.5% decline in military outlays.
State and local spending rose 0.3%, however.
Inflation as measured by the PCE index was flat in the second quarter and fell to the lowest level in four years. The core PCE excluding food and energy rose just 0.8%, marking the smallest gain in almost three years.
The low level of inflation gives the Federal Reserve ample time to decide how quickly to end its monthly purchases of $85 billion in government bonds and mortgage-back securities.
The Fed is expected to begin to scale back its purchases — part of a strategy to keep interest rates ultra-low — before the end of the year. The central bank might drop a hint on the timing of a move after Fed officials wrap up a big meeting on Wednesday.Read: Fed watchers debate timing of taper.
Inflation-adjusted disposable income, or the money people have left over after taxes, increased 3.4% after declining in the first quarter. Americans used some of the extra cash to boost their savings. The personal savings rate rose to 4.5% compared to a 4.0% in the first three months of the year.
Jeffry Bartash is a reporter for MarketWatch in Washington.
